Portfolio construction
Follow-on reserves
Why holding capital back for later rounds in your winners is the highest-quality use of angel money, and how much to reserve.
The most valuable investment decision an angel makes is usually not the first cheque into a company. It is the second one, three years later, when the company has demonstrated that it works and you have the contractual right to buy more of it.
The reason is information. Your first cheque is written with almost nothing to go on. Your follow-on is written with three years of observed performance, a working product, real customers and a founder you now know. Nowhere else in angel investing do you get to increase a position with that much more information than you had originally.
The constraint is that you must have both the right and the money. Pro-rata rights are covered in the deal terms; this chapter is about the money, and about the discipline of not spending it on new companies.
How much to reserve
Common practice among angels who follow on deliberately is to reserve between 30% and 50% of the total allocation, which works out at roughly one to two times each initial cheque across the portfolio.
The reserve does not need to cover following on in every company, and should not. You will follow on in a minority of positions — the ones performing well enough to justify it — so a reserve sized at one to two times the initial cheque per position is generous rather than tight.
The trap is that reserves feel like idle capital. Money not yet invested produces no marks, no stories and no sense of progress, and the pressure to deploy it into new opportunities is constant. That pressure is why most angels who intend to follow on do not.
| Use | Amount | Detail |
|---|---|---|
| First cheques | £150,000 | 25 investments at £6,000 |
| Follow-on reserve | £100,000 | about £4,000 per position on average |
| Realistic follow-on pattern | £100,000 | 8-10 follow-ons at £10,000-£15,000 |
| Companies followed on | roughly a third | only the ones performing |
Illustrative allocation of a £250,000 total across first cheques and follow-ons.
When to follow on
The decision should be made as a fresh investment at the new price, not as a defence of the original one. The money already invested is gone whatever you do next, and treating a follow-on as protecting it is the sunk cost fallacy in its purest form.
The questions that matter: has the company demonstrated the specific things the previous round was meant to prove; is the new price justified by what has changed; would you invest at this price if you had never met them; and is there a better use for the same money in your existing portfolio.
The last question is the one angels skip. Follow-on capital is scarce, and a follow-on in a company that is merely fine competes with a follow-on in one that is genuinely working. Ranking the portfolio before committing is a five-minute exercise that materially improves the decision.
When not to follow on
Do not follow on to avoid dilution in a company that is not performing. Dilution in a mediocre company is not a problem worth spending money to solve — you are buying more of something that has not demonstrated it works.
Do not follow on out of loyalty to the founders, or because declining feels like a vote of no confidence. It sometimes is one, and that is a legitimate signal to send.
And do not follow on into a round whose terms are materially worse than your original, without pricing that in. A bridge at a lower cap, a new senior preference or a pay-to-play provision all change what your money is buying.
In short
What to take away
- Reserve 30% to 50% of the allocation before you make your first investment.
- Judge every follow-on as a fresh investment at today's price, ignoring what you already put in.
- Rank the whole portfolio before committing reserve capital — the alternative use is another position, not cash.
- Never follow on merely to avoid dilution in a company that is not performing.
From the decoder